European investment bankers are beginning to sense a shift in sentiment among investors, with appetite for higher yields creating a sustained move into equities for the first time since the middle of 2008 and demand for riskier credit in the financial and sovereign sectors.

Last week, the FTSE 100 index hit levels not seen since May 2008. The S&P 500 is currently hovering around a five-year high. According to data from research company EFPR, inflows into global equity funds were the highest since 2007.

Inflows into US equity funds hit $18.3bn for the week ending January 9, according to fund data provider Lipper, the fourth largest inflow since records began in 1992.

Lipper’s Tom Roseen said that excluding ETF activity “[US] investors were much more risk-seeking after the budget agreement surrounding the fiscal cliff”, adding that domestic equity funds saw net inflows of $4bn last week, with non-domestic equity funds taking in $3.5bn.

Marisa Drew, global co-head of global market solutions group at Credit Suisse, said: “Last year when people couldn’t decide whether there was going to be Armageddon in Europe they were not prepared to take equity risk. They wanted the downside protection of a coupon. Now we’re past that. You see it in every cycle – you start in investment grade, then you move down the credit spectrum to high-yield, then you see converts pop up and then you go down to equity.”

Confidence was given a boost last week when ArcelorMittal, a steel company, attracted $20bn of demand from investors for $4bn in mandatory convertible notes and stock, a target that was increased from an initial $3.5bn estimate, according to bankers on the deal.

Half the demand for ArcelorMittal paper was from the US.

Yacine Amor, head of the equity-linked team for Emea at Bank of America Merrill Lynch, said: “The big, big trend right now is US managers being much more bullish around Europe.”

Percival Stanion, head of multi-asset at Baring Asset Management, is buying equities. He said: “US growth is picking up on an underlying basis – housing is definitely lifting. All this will help durable sales and lift more people out of negative equity. Europe is still struggling, but is probably past the worst and ECB has a full toolkit to stabilise a crisis.”

Jim O’Neill, chairman of Goldman Sachs Asset Management, said the premium return offered by equities over cash is generous, adding that real interest rates are low.

Bankers cite the ECB’s commitment to intervene in struggling European sovereign bond markets via its Outright Monetary Transactions facility as being behind the improvement in sentiment in Europe. Stanion said that the risk on/risk off trade came to an end when the ECB made a commitment to do whatever was needed to support the euro. No purchases have yet been made, but the facility is in place for when a government makes the request and is prepared to make the conditions attached to intervention.

Gary Jenkins of Swordfish Research on Friday wrote: “The ECB have removed the short-term risk of a liquidity crisis of a sovereign and thus the major risk to the eurozone is one of a slightly slower burning nature concerning the economy’s influence on politics.”

The iTraxx Main index, measuring secondary investment-grade corporate credit spreads, tightened by 29% over the course of 2012. Yields have also been coming down in high-yield: for the three months to October 19, the average yield on BB-rated bonds dipped below 6% for the first time ever, hitting a historical low of 5.62%.

One head of corporate debt capital markets said: “I think all the fun this year in the bond market is going to be in financials and to a lesser extent sovereigns. We’re seeing it already. Given the tightening in investment grade and corporate credit, people ask if there’s much more performance they can get out of those markets. Do they go to Volkswagen at 78 basis points over swaps or Ireland at 250bp? Or do they go into equities, where the FTSE 100 was 3.5% up in the first 10 days of the year?”

Cameron Brandt, director of research at EFPR Global, said: "Calling a trend occurs over a much shorter time than it used to."